The Two Sides of Bankruptcy

Say bankruptcy to a person and for sure he will instantly connect it to these things: closing down of companies, losing much money, bad debts, repossession of properties, strict legal procedures and even cutting off of utilities services. But are these the only things associated with bankruptcy? Let us first tackle what bankruptcy really is.

What is Bankruptcy?

In finance, bankruptcy is a legal process by which people and businesses can obtain a fresh start from their debts. Filing for bankruptcy means that a person or a business is in dire financial difficulty. The entity cannot repay the debts owed based on the agreement made with creditors.

In this option, all or a portion of the outstanding debts will be eliminated. If this is not possible, the terms of payments will just be extended, under the supervision of a court.

Bankruptcy is not only meant to protect debtors. It also serves an important function for creditors. This is because  unsecured creditors can equally share in whatever payments a borrower can afford to make. This way they are also able to regain a portion of the funds they have provided for credit.

Now, what are the good and bad sides of having a bad credit report? How does this option influence the records you have with the three credit reporting agencies? Allow us to discuss the answers to these questions.

The Good Side of Bankruptcy

Upon filing for bankruptcy, all collection activities must stop. Your creditors cannot attempt to collect the debts you owe them. This is because a bankruptcy removes your legal obligation to repay most of your debts. You are also given due rights to protect yourself from harassment, especially from overeager credit collectors. You can easily file complaints against any lender who will try to regain the money you owe them, even though you have already filed for bankruptcy.

Bankruptcy also provides protection. It can prevent you from losing valuable utilities services. This is because the law mandates utilities providers to continue or restore providing services to your home.

You can also prevent further wage garnishment. This assures you that you receive the full income you earn each month, and that no part of your income will be taken to pay any of your debts. Still, this special provision of bankruptcy is subject to the result of the Means Test that will be employed by the bankruptcy courts to determine whether or not your monthly income allows you to repay your existing credit obligations.

Bankruptcy also provides you an opportunity to start anew. Without worrying about debts, you can easily focus your attention in managing your finances well. You can also make a conscious effort not to restore old spending habits. This will surely prevent you from falling again into debt traps.

The Bad Side of Bankruptcy

Of course, bankruptcy has its own negative aspects. A bankruptcy mark is usually retained on your records for a maximum of ten years. This will cause you to have a bad credit report and this may in turn influence your chances of easily locating low interest loans. Lenders are usually reluctant to extend credit to people with bad marks in their credit report. Still, a growing number of lending firms are offering loan programs even after a recent bankruptcy. This is because they know that a debtor cannot file again for this option for another seven years. Thus, they feel assured that they can regain the money they extend for credit.

A bankruptcy also pulls your credit score down. You can lose more than a hundred points in your records with the three credit report firms. And it may take some time for you to recover your lost points. But, if you are determined enough to recover your financial health, you just have to wait for your bankruptcy mark to close. Then you can apply for a new loan. Just make sure that you pay all your charges on time, and soon your credit scores will shoot up. In the end, you will hold on to a credit report that you can really be proud of.


About the Author:

Suzy Vanstrusen is a credit analyst and a writer on the website She has been providing consumers with tips and wise information about credit repair as well as helping you out more with your bad credit loans.  Copyright ¬© 2010

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